Are Canadian Leaders’ Misperceptions Stalling Innovation?

Daniel Munro
Principal Research Associate
Industry and Business Strategy

A study1 by the Conference Board on business leaders’ perceptions of the climate for innovation shows that what leaders believe is not always in tune with reality and that the gap may be hurting innovation performance.

The study, which analyzes data from the World Economic Forum’s (WEF) Global Competitiveness Report 2011–2012, finds that although Canadian business leaders see innovation-supporting strengths in Canada’s higher education system, they see weaknesses and barriers in the regulatory and tax regimes, capital markets, and the lack of competitiveness in domestic markets.

In most cases, the leaders’ perceptions are confirmed by data and independent analysis. But in the case of perceptions about the tax burden, Canadian business leaders believe that they face a much higher barrier to innovation than they actually do in reality.

Innovation Facilitators and Barriers

Higher Education and Human Capital. The quality of Canada’s education and research institutions, and its human capital more generally, provide a strong foundation for research and innovation. Canada ranks 12th of 142 countries on the WEF’s Global Competitive Index, edging out the United States, and near innovation leaders like Switzerland and Sweden.

Financing for Innovation. WEF results suggest that although Canadian innovators’ access to financing may be better than many believe, it is still a brake on some innovation activity. While Canada ranks 13th overall on “financial market development” we rank lower on innovation-influencing sub-indicators like “ease of access to loans” (22nd) and the availability of venture capital (19th).

Demand and Competitive Intensity. Relatively weak local competition and government procurement, along with Canada’s long-standing reliance on natural resources extraction, may be reducing firms’ motivation to innovate. Business leaders rank Canada below many international competitors with respect to the intensity of local competition (21st) and government procurement of advanced technology products (35th), both of which are closely associated with innovation performance.

Opportunities to improve exist in all three areas. Enhancing Canada’s innovation performance will require serious attention to capital markets and competitive intensity as well as sustained efforts to maintain our advantages in education and human capital.

Perceptions also need to be brought into line with reality in order to galvanize business leaders to take action. This is particularly true regarding business perceptions about taxes.

Innovation and Tax Burdens: Perceptions vs. Reality

Canadian business leaders believe that high taxes in Canada are a major barrier to innovation. They rank Canada a lowly 40th with respect to the extent and effect of taxation. However, their perceptions are not matched by the data on taxes which shows Canada’s actual total tax rate ranks it 29th in the world.2 Only Ireland, which places 24th, outranks Canada among the 17 countries that the Conference Board regards as the country’s main international competitors.

Canada’s total tax rate is actually better than most countries that outperform us on the Conference Board’s innovation rankings, including top-performing Switzerland, and other innovation leaders like Japan and Sweden. In fact, because Canada’s total tax rate has declined since the WEF collected its data, our lead over our main competitors may have increased even further.

From Perceptions to Reality to Performance

Certainly, Canada’s tax environment could be reformed to make it even friendlier to business innovation. But, even as it stands, the tax environment is more supportive of innovation than Canadian leaders seem to believe. Since business strategies are ultimately based on leaders’ decisions, their perceptions of the tax environment really matter. And because they view the tax burden as higher than it really is, we may be seeing less innovation activity than would be the case if they knew the facts. One way to stimulate more innovation investment would be to conduct a major communication campaign to bring leaders’ perceptions in line with tax reality—this could yield major performance gains.

The Centre for Business Innovation

Businesses need to be a major part of changing Canada’s innovation environment and performance. It will also be critical for them to have a sound understanding of the implications of change, and how they can make the most of their opportunities. To meet these needs, and to help bring about major improvements in firm-level business innovation in Canada, the Conference Board has established a new Centre for Business Innovation (CBI).3 The CBI’s mission is to:

Develop business strategies for firms and capital markets to improve firm-level innovation.

Contribute to formulating public policies that will stimulate business innovation.

Help Canada become a world leader in firm-level innovation.

By bringing together and working directly with business, government, and academic leaders, the CBI acts as a forum to discuss how firms can become more successful innovators.

2 The World Economic Forum calculates that “total tax rate” as a “combination of profit tax (% of profits), labor tax and contribution (% of profits), and other taxes (% of profits). World Economic Forum (2011), 456.